Whether a franchise continues to operate depends on the renewal of a franchise agreement after the initial term. A franchise agreement operates for a fixed period and usually includes an opt-in additional term. For instance, a “5 x 5” term indicates an initial five years with an option to renew for a further five.
Before purchasing a franchise, prospective franchisees should ask:
- Can you renew the franchise agreement? and
- How is the franchise agreement renewed?
We set out the steps to renew a franchise agreement and answer some common questions about the process.
1. Start With the Franchise Agreement
The process of renewing a franchise agreement differs across systems. If you’re considering purchasing a franchise, be clear on the renewal process before entering into your first term of the agreement. Under the Franchising Code of Conduct, you are guaranteed at least 14 days to review and consider the franchise agreement. Make sure the advice you obtain covers the renewal process.
2. Be Practical
Take practical steps to ensure you’re in a position to renew the agreement at the appropriate time. Put reminders in your calendar to reflect the timing of when you’ll need to notify the franchisor of your intentions to renew. Don’t leave it until the end of the period to notify the franchisor! This gives you time to discuss and resolve issues before a final determination on the renewal.
3. Consider the Lease Agreement
If a franchise is in a fixed physical location where there is also a lease, such as a café or shop, you need to also consider the term of the lease on the renewal of the franchise agreement. The lease term may not run concurrently with the term of your franchise agreement. In this case, the lease agreement term may extend into the franchise agreement renewal term but may not go through until the end of that term. Either yourself or the franchisor, if responsible for lease management, may opt to renew or extend the lease agreement with the landlord.
Sometimes, it is not possible to renew the lease for various reasons. In this case, it is common to have a term in the franchise agreement that automatically reduces the renewal term of the franchise to match the remaining term of the lease agreement.
If the lease agreement can’t be renewed at the time you make a franchise renewal request, the agreement will often contain a clause stating that it expires with the lease.
Do I Always Have the Right to Renew the Franchise Agreement?
In operating a franchise, the franchisor essentially grants you a conditional licence to use their brand and systems for a fixed period. The licence is not indefinite, and a franchisor can elect not to renew your agreement (subject to the terms of the franchise agreement).
The franchisor is obliged to renew the franchise agreement if you decide to renew after the initial term. But it’s common for this obligation to be subject to several conditions. If you fail to meet these conditions, the franchisor can refuse your request.
Some conditions may include that the franchisee:
- has generally complied with the terms of the franchise agreement throughout the initial term;
- is not currently in breach of any term of the franchise agreement;
- has not been issued a certain number of breach notices by the franchisor through the initial term of the agreement;
- does not currently have outstanding amounts owed to the franchisor (such as franchise fees or marketing fees);
- has met any minimum performance requirements set out in the agreement;
- has paid any applicable renewal costs; and
- has not entered administration, liquidation or faced a bankruptcy related event.
If you dispute your franchisor’s right to refuse your renewal request, you should seek advice from a franchise lawyer.
The process of renewing your franchise agreement is important for existing franchisees and prospective franchisees. Be practical and give yourself enough time to resolve any issues that may interfere with renewing the agreement. If you have any questions or need advice on the renewal process, get in touch with LegalVision’s specialist franchise team on 1300 544 755.
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